Mand a
Download as PPT, PDF0 likes341 views
This document discusses mergers and acquisitions (M&A). It defines key terms related to corporate control and structure. It provides examples of recent large mergers across various industries. It outlines both sensible and dubious rationales for mergers, including economies of scale, filling complementary needs, surplus funds, diversification, and earnings per share manipulation. The document discusses estimating potential economic gains from mergers using discounted cash flow models. It also covers leveraged buyouts, takeover defenses, and methods of acquiring companies like tender offers and proxy contests.
Mand a
- 1. MERGERS AND ACQUISITIONS The Market for Corporate Control
- 2. M&A Activities • Mergers • Takeovers • LBOs • Compensation • Spin-offs, etc.
- 3. Definitions • Corporate control -- the power to make investment and financing decisions. • Corporate governance -- the role of the Board of Directors, shareholder voting, proxy fights, etc. and the actions taken by shareholders to influence corporate decisions. • Corporate structure -- the financial organization of the business.
- 4. Recent Mergers Payment Industry Acquiring Company Selling Company ($billions) Telecoms Vodafone (UK) Mannesmann (germany) 203.0 Pharmaceuticals Sanofi (France) Aventis (France/Germany) 64.0 Pharmaceuticals Pfizer Pharmacia 59.5 Banking JP Morgan Chase Bank One 58.0 Banking Bank of America FleetBoston Financial Corp. 49.3 Telecoms Cingular Wireless AT&T Wireless Services 41.0 Mitsubishi Tokyo Financial Banking Group (Japan) UFJ Holdings (Japan) 25.7 Healthcare Anthem Wellpoint Health Networks 16.4 Insurance St. Paul Companies Travelers property Casualty 16.1 Banco santander Central Banking Hispano Abbey (UK) 15.6 Banking/Consumer Finance HSBC Holdings (UK) Household International 15.3 Vivendi Universal Entertainment Media General Electric (France) 13.7
- 5. Sensible Reasons for Mergers Economies of Scale A larger firm may be able to reduce its per unit cost by using excess capacity or spreading fixed costs across more units. Reduces costs $ $ $
- 6. Sensible Reasons for Mergers Economies of Scope or Vertical Integration – Control over suppliers “may” reduce costs. – Over integration can cause the opposite effect. Pre-integration Post-integration (less efficient) (more efficient) Company Company S S S S S S S S
- 7. Sensible Reasons for Mergers Combining Complementary Resources Merging may result in each firm filling in the “missing pieces” of their firm with pieces from the other firm. Firm A Firm B
- 8. Sensible Reasons for Mergers Combining Complementary Resources Merging may result in each firm filling in the “missing pieces” of their firm with pieces from the other firm. Firm A Firm B
- 9. Sensible Reasons for Mergers Mergers as a Use for Surplus Funds If your firm is in a mature industry with few, if any, positive NPV projects available, acquisition may be the best use of your funds.
- 10. Dubious Reasons for Mergers • Diversification – Investors should not pay a premium for diversification since they can do it themselves • Empire Building • EPS Game – EX: High PE firm buys Low PE firm -- resulting in higher EPS for merged firm (the bootstrap game)
- 11. Dubious Reasons for Mergers The Bootstrap Game Selling firm has low P/E ratio (due to low number of shares) After merger, acquiring firm has short term EPS rise Long term, acquirer will have slower than normal EPS growth due to share dilution.
- 12. Dubious Reasons for Mergers The Bootstrap Game World Enterprises World Enterprises (after buying Muck (before merger) Muck and Slurry and Slurry) EPS $ 2.00 $ 2.00 $ 2.67 Price per share $ 40.00 $ 20.00 $ 40.00 P/E Ratio 20 10 15 Number of shares 100,000 100,000 150,000 Total earnings $ 200,000 $ 200,000 $ 400,000 Total market value $ 4,000,000 $ 2,000,000 $ 6,000,000 Current earnings per dollar invested in stock (EP) $ 0.05 $ 0.10 $ 0.067
- 13. Dubious Reasons for Mergers EP Ratio (log scale) World Enterprises (after merger) World Enterprises (before merger) Muck & Slurry .10 .067 .05 Time Now
- 14. Sensible Reasons for Mergers • Unused Tax Shields • More Debt Capacity – More Tax Shield – Lower BK Costs
- 15. Sensible Reasons for Mergers • Inefficient Management (Agency Problems) • Management Controls – Capital Markets (mergers, takeovers, LBOs) • Other Managerial Controls – Board of Directors – Labor Markets (External & Internal) – Compensation Incentives (options)
- 16. Board of Directors • Independent? • Monitoring • Hire/Fire • Compensation • Strategic Planning
- 17. Estimating Merger Gains • Questions – Is there an overall economic gain to the merger? – Do the terms of the merger make the company and its shareholders better off? PV(AB) > PV(A) + PV(B)
- 18. Estimating Merger Gains • Economic Gain Economic Gain = PV(increased earnings) New cash flows from synergies = discount rate
- 19. Example: Snowbird & Alta Snowbird is examining the purchase of Alta, which would become a subsidiary of Snowbird if the merger goes through. The projected cash flow statement for Alta (if merged) is shown on the next slide. These cash flows include all synergistic effects. Alta’s market-determined beta is 1.63. The risk-free rate is 10 percent and the market risk premium is 5 percent. Alta has 10 million shares of stock priced at $6.25. What is the possible economic gain to this merger, if any?
- 20. Snowbird & Alta Projected Post-Merger Cash Flows for the Alta Subsidiary as of December 31 2002 2003 2004 2005 2006 Net Sales $ 105.0 $ 126.0 $ 151.0 $ 174.0 $ 191.0 Cost of Goods Sold (75.0) (89.0) (106.0) (122.0) (132.0) Selling and Admin. Expense (10.0) (12.0) (13.0) (15.0) (16.0) Depreciation (8.0) (8.0) (9.0) (9.0) (10.0) EBIT 12.0 17.0 23.0 28.0 33.0 Interest (8.0) (9.0) (10.0) (11.0) (11.0) EBT 4.0 8.0 13.0 17.0 22.0 Taxes (40%) (1.6) (3.2) (5.2) (6.8) (8.8) Net Income 2.4 4.8 7.8 10.2 13.2 Add Back Depreciation 8.0 8.0 9.0 9.0 10.0 Cash Flow from Operations 10.4 12.8 16.8 19.2 23.2 Less Retentions Need for Growth (4.0) (4.0) (7.0) (9.0) (12.0) Add TERMINAL VALUE 150.2 Net Cash Flow 6.4 8.8 9.8 10.2 161.4
- 21. Snowbird & Alta Discount Rate r = r + β (rm − r ) f f = .10 + 1.63 (.05) ≈ .182
- 22. Snowbird & Alta Terminal Value Assume: terminal growth rate of 10% CF CF (1+ g ) V = 2007 = 2006 2006 r−g r−g = (23.2 − 12.0)(1.10) .182 − .10 = 150.2
- 23. Snowbird & Alta Total Firm Value V = $6.4 + $8.8 + $9.8 2001 (1.182)1 (1.182)2 (1.182)3 + $10.2 + $161.4 (1.182)4 (1.182)5 ≈ $92.8
- 24. Snowbird & Alta Possible Economic Gain = Merger Value - Pre-merger Value = $92.8 - $6.25 x 10,000,000 = $92.8 - $62.5 = $30.3 million
- 25. Snowbird & Alta Change in Snowbird Stockholders’ (Acquirer) Alta (Target) Wealth Bargaining Range Price Paid = Synergy $62.5 $92.8 for Target
- 26. Takeover Methods Tools Used To Acquire Proxy Contest Companies Tender Offer Acquisition Merger Leveraged Management Buy-Out Buy-Out
- 27. Takeover Defenses White Knight - Friendly potential acquirer sought by a target company threatened by an unwelcome suitor. Shark Repellent - Amendments to a company charter made to forestall takeover attempts. Poison Pill - Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.
- 28. Leveraged Buyouts • The difference between leveraged buyouts and ordinary acquisitions: 1. A large fraction of the purchase price is debt financed. 2. The LBO goes private, and its share is no longer trade on the open market.
- 29. Leveraged Buyouts • The three main characteristics of LBOs: 1. High debt 2. Incentives 3. Private ownership
- 30. Leveraged Buyouts 10 Largest LBOs in 1980s and 1997/98 examples Value Acquirer Target Industry Year ($mil) KKR RJR Nabisco Food, tobacco 1989 24,720 KKR Beatrice Food 1986 6,250 KKR Safeway Supermarkets 1986 4,240 Thompson Co. Southland (7-11) Convenience stores 1987 4,000 KKR Owens-Illinios Glass 1987 4,680 Wings Holdings NWA, Inc. Airlines 1989 3,690 TF Investments Hospitals 1989 3,600 Macy Acquisitions Corp. Department stores 1986 3,500 Carlyle Group & Welsh, Carson, Anderson and Stowe Quest Dex Yellow pages 2002 7,050 TRW Automotive Blackstone Group Holdings Auto parts 2002 4,700 KKR PanAmSat Satellites 2004 4,380 Texas Pacific group, Bain Capital. & Goldman Sachs. Burger King Fast food 2002 2,260
- 31. Phillips Petroleum Case Philips balance sheet was dramatically changed by its leveraged restructuring (figures in $billions). 1984 Balance Sheet (Before LBO) Net Working Capital (0.7) 5.1 Debt Fixed Assets 12.4 6.6 Equity Total assets 11.7 11.7 Total liabilities 1985 Balance Sheet (After LBO) Net Working Capital 0.0 9.3 Debt Fixed Assets 10.9 1.6 Equity Total assets 10.9 10.9 Total liabilities
- 32. Spin-offs, etc. • Spin off -- debut independent company created by detaching part of a parent company's assets and operations. • Carve-outs -- similar to spin offs, except that shares in the new company are not given to existing shareholders but sold in a public offering. • Asset Sales -- the sale of the assets of a division to other firms .
- 33. EXIT (Overcapacity) 1. Capital Markets 2. Internal Control Mechanisms 3. Regulation and Legal System 4. Product and Factor Markets • (Michael Jensen’s arguments) Is M&A good or bad for economic efficiency?
- 34. Summary • M&A is Corporate Control Activity • Many Sensible Reasons for Mergers • Measure the Gains to Merger – New cash flows from synergies – Discount rate – DCF Analysis • Other M&A Activities • The Role of M&A Activity for the Economy